A combination of increasing competition from elsewhere in the financial services industry and historically low level of interest rates will give life insurers difficulties in offering attractive products, a new report from Celent says.

The report, “Wealth Management Opportunities in the European Life Insurance Industry: A Focus on Protection Product,” says variable annuities products are particularly vulnerable to the vagaries of the broader financial markets.

“With the high turbulence experienced by financial markets in 2008 and 2009, insurers with variable annuity books have realized that their hedging programs did not provide the level of protection that many had expected,” the report, authored by Isabella Fonseca and Nicolas Michellod, states. “In addition, the high volatility of financial markets increases the cost of hedging, making variable annuities more difficult to sell even to high net worth clients.”

Adding to the macroeconomic challenges, life insurers will be vying against a cadre of strong competitors from elsewhere in the financial services industry to service a new generation of retirees. “Among others, we think life insurers will face increasing competition from mutual funds and structured products suppliers,” the report states.

To thrive in this evolving marketplace, the authors say insurers will need to rethink their product portfolio strategy and to improve operational efficiency. “We believe insurers need to launch initiatives to automate what can still be automated and analyze where outsourcing options might help them decrease operational costs without lowering the quality of services delivered to clients and partners.”

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